Property

Deposit loans pushing up leverage ratio

Many industries of the Chinese real economy are growing weaker as issues such as overcapacity become more and more apparent. The stock market, as a result, has also slumped. Investors are looking elsewhere to invest as investments that would provide a safe and secure return have become rare. Capital has therefore been flowing into the real estate market, especially to that of the 4 Tier-One cities, as properties are deemed to be a safe haven from the slowing economy and have hence become the public’s first choice for investment. Yet, the enthusiasm of the public may have covered up some of the hidden risks present in the market.

The real estate market has always had a much higher leverage ratio due to the support from mortgage loans, with gearing reaching up to 3 times the capital available for a first-time buyer. As the idea of investing in the real estate market becomes popular and the market grows frantic, some have opted to enter the market with the help of deposit loans and crowdfunding. As a result of the strong demand for properties and the availability of loans, both prices and gearing ratios in the property markets of the four Tier-One cities, especially Shenzhen, have reached a historic high. Some analysts have made reports stating that around 30% of the new home owners in China have bought their properties with the help of unsecured loans provided by estate agencies, with total loan of the kind amounting to around RMB 1 trillion. The Shenzhen Financial Services Office openly requested, in the beginning of March, to investigate the P2P platforms and microcredit companies involved in crowdfunding, deposit loans, or other activities that increases the gearing ratio of the municipal’s real estate market. The Beijing Bureau of Finance Work has then followed Shenzhen’s footstep and started its investigation on the issue shortly afterwards. “Deposit loan” has become a key word in the property market at the time.

The Vice President of the People’s Bank of China stressed after the National People’s Congress on 12th March about the illegality of unsecured loans for deposits for property purchases and that there are even signs of self-financing and self-warranting in the current market. The Central Bank will be working together with other authorities in order to regulate online finance businesses and to fight against those that provide deposit loans to property buyers, violating housing loan regulations and, as a result, increasing leverage ratio of the real estate market.

Despite the high level of attention from the media and the authorities, the issue of deposit loans may not have been as significant as how the press presented it as. The minimum deposit-to-loan ratio at the four Tier-One cities is still 25% and banks often do not lend out the whole purchase price of properties because of the fast growing prices. With authorities now focusing on the ban of such loans, the issue is expected to become less and less significant in the future.